Calculating Fixed Costs

February 26, 2009 · 10 comments

I posted yesterday about my formula for determining whether or not I consider a flip project to be worth undertaking. In my formula, I referred to “Fixed Costs” and I mentioned that my Fixed Costs for a recent project were about $17,000. I quickly received a comment asking for more detail around that number, so here goes…

Fixed Costs are compromised of the various fees, commissions, and costs associated with all parts the investment project (outside of the actual rehab costs). While each investor (and each project) likely has their own specific fixed costs, for me they can generally be broken down into the following three categories:

  1. Purchase Costs
  2. Holding Costs
  3. Selling Costs

And then each of these categories can be broken down in more detailed expense line-items…

Purchase Costs

Purchase Costs refer to those fixed expenses that contribute to the purchase of a property. For my projects, Purchase Costs can specifically be broken down as follows:

  • Inspection Costs: In general, I have an inspection for each of my properties prior to purchase. I use the same inspector for every inspection, and for the most part he charges about $400 for a full inspection of a typical property.
  • Closing Costs: Each purchase comes with a fixed set of closing costs paid by the buyer. In Georgia, and for REO purchases, this generally includes a title search, attorney fees, courier fees, recording fees, state taxes, document review fees, etc. Basically, all those ridiculously inflated costs charged by the closing attorney to ensure clear title and recording of the new deed. Across all my purchases, these costs generally come in around $1000.
  • Lender Fees: For the most part, I use the same lender to finance each property purchase. The lender charges a set of up-front fees to fund the loan, including a Loan Origination Fee, appraisal, underwriting fee, flood certification, document preparation fee, processing, fee, credit report fee, etc. (again, all those ridiculous and inflated fees that contribute to the lender’s bottom line). While every investor and every lender will have a specific sets of fees — and while these fees are somewhat tied to the purchase price of the property — for a typical acquisition I do, these Lender Fees total around $2000 per property.

Holding Costs

Holding Costs refer to those expenses that add up between the time I acquire the property and the time I sell the property. For my projects, Holding Costs can specifically be broken down as follows:

  • Mortgage Payments: On a typical project, my monthly mortgage payment will be about $500. And a typical project — from purchase to sale — will generally run between 4-6 months. So, during that time, I’ll generally make about $2500 worth of mortgage payments to my lender to keep the property.
  • Property Taxes: On the properties I purchase, the typical yearly property taxes are on the order of $1400. Again, if I hold the property for 4-6 months, this will average out to about $600 in property taxes per project.
  • Utilities: While performing rehabs, I like to ensure that all utilities (electricity, water and gas) are turned on. This is both for the convenience of my contractors as well as to help diagnose any issues with the property. Because the seasons in Georgia tend towards extreme temperatures, I’ve found that my utilities in my properties generally run about $200 per month for the duration of the project. Again, over 4-6 months, this averages about $1000 per project in utility costs.
  • Insurance: Typical insurance costs for my properties is about $350-400 per year. On average, I pay about $200 in insurance costs for each project.

Selling Costs

Selling Costs refer to those fees and commissions that must be paid for me to sell a property. Again, different investors will use different marketing mechanism to sell their houses, so selling costs for each investor may be quite different. For my projects, Selling Costs can be broken down as follows:

  • Commissions: Because my wife is our real estate agent, we save about half of the commissions we would otherwise incur when selling a property. That said, if our buyer has their own agent — they generally do — we must pay about 3% of the purchase price to that agent at the sale. A typical property of ours sells at about $120K, so that 3% comes out to about $3600 paid to the buyer’s agent at the sale of our property. Add to that the fees my wife pays to her broker, and the total commissions average about $3900 per property sale.
  • Closing Costs: In this market, most buyers ask the seller to pay some or all of their closing costs. On our sales, we’ve been asked to pay anywhere from $2000 to $6000 in closing costs for the buyer. On average, we’re asked to pay about $4000 in buyer closing costs, and because it is a buyer’s market, we generally agree to it.
  • Home Warranty: Most first-time home buyers (the type we cater to) request that the seller purchase a home warranty as a condition of the sale. We always expect to do this (and almost always have), and this adds about $500 to the cost of the sale for us.
  • Termite Letter: In addition to the home warranty, many buyers (and/or their lenders) require us to provide a proof of termite inspection at the sale. This generally runs somewhere just below $100.
  • MLS Fees: Because my wife is our agent, she is required to pay a fee to the local MLS for listing the property. This generally runs about $100.

As you can see above, buying, holding and selling a property can cost a lot of money in fixed fees. Let’s see how these add up on a typical project of mine:

Fixed Costs

And there you have it — it costs me about $16,500 in commissions and fees just buy, hold and sell a property. Many investors ignore these costs when calculating their potential profit on a deal; but, consider that if you plan to earn about $15K on a typical project, these costs can actually mean the difference between earning your desired profit and losing money!

10 responses to “Calculating Fixed Costs”

  1. Steve says:

    If you self fund a property do you still add mortgage costs? How many months of holding time do you budget for? This can be difficult on smaller rehabs (we always end up budgeting 4-5 mos, FHA rules). Does your lender require an independent appraisal?

  2. Bilgefisher says:

    Good to see your numbers. I didn’t include purchase costs into my fixed costs. That explains the difference. The nice part about your estimate is the conservative side of it. I imagine you work some discounts in here since you buy a decent number of properties.

  3. J Scott says:

    Steve –

    If I buy cash, I’ll generally subtract about $5K from my Fixed Costs estimate. In the real world, I like to use the number $20K for Fixed Costs with a loan and $15K for Fixed Costs if I buy cash. From the analysis above, this estimates are on the high side, but I’d rather can conservative than aggressive, at least in this market. My lender does their own appraisals (in-house), and I end up eating the cost for that.

    I always assume at least 5 months of holding time from purchase to sale. I should probably use 6 months, but so far, 5 has been a good average.

    Bilge –

    There aren’t too many discounts that can be had here. Once I’ve worked with this new lender on a few projects, I’ll talk to them about cutting some recurring costs, and my inspector has started giving me some breaks because of all the business I give him.

    But for the most part, these costs are pretty fixed. The real savings comes from the rehab costs, which can be reduced by using materials and contractors at scale.

  4. hakrjak says:

    Good detail as always. I can’t tell you how it felt when I was a newbie and got to closing that first couple times completely forgetting to include certain costs in my calculations and knowing that I was making a lot less money than I thought I was. It’s always best to keep a spreadsheet like you do to track every single cost.

  5. ezra says:

    Here’s my formula:

    1) Buy at the peak of the market.
    a) get in bidding war
    b) forego inspection

    2) Wait for market to tank.
    a) for mortgage to adjust
    b) for economy to collapse

    3) List property!

  6. J Scott says:

    Ez –

    It’s funny…’cause it’s true… 🙂

  7. Ed says:

    Wow that’s a lot of money in fixed costs. Just wondering what is your average profit after these costs.

  8. Steve says:

    Ed –
    I would say a typical investor makes 15-20% of the sale price. Maybe a little bit more on deals under $100k and a little less on deals over $400k. J Scott may have a different answer.

    J Scott –
    You mind posting or emailing me some details on your lender? You seem to be paying quite a bit less than me. Is it a traditional lender or hard money? What are their terms?

  9. J Scott says:

    Ed –

    On the two projects that have been completed and closed so far, you can see all my numbers here:

    and here:

    The third project to close sale will be The Second Chance House next week, and while I don’t have final numbers just yet, I expect profits on this one to be right in the same range.

  10. J Scott says:

    Steve –

    I use a rehab lender — a small local bank that lends both acquisition and rehab costs. Terms (for me, yours may be different) are a 1-year interest-only loan, with rates at Prime + 1.75% (minimum 6.75%) and 1.25 points upfront. They require 20% down.

    So, these days, on a typical $60K project, I’m taking out a $48K loan, and am paying $600 in points, $400 in appraisal fees, $300 in inspection fees (for the bank to inspect the property when I request rehab draws), and about $200 in other miscellaneous fees. So, total lender closing costs add up to about $1500, though I estimate $2000 just to be safe.

    The closing costs on top of the lenders fees (attorney fees, title search, title insurance, etc) generally run about $1000.

    Feel free to shoot me an email at: and I’ll send you my lender’s details.

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